Healthcare Market Competition 1998

8/13/2019 Healthcare Market Competition 1998

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Health Care

Market

Competitionin Six States:

Implications

for the PoorRandall R. BovbjergJill A. MarstellerThe Urban Institute

Occasional Paper Number 17

An Urban Institute

Program to AssessChanging Social Policies

The Urban

Institute2100 M Street, N.W.

Washington, DC 20037

Phone: 202.833.7200

Fax: 202.429.0687

E-Mail: [email protected]://www.urban.org


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Copyright November 1998. The Urban Institute. All rights reserved. Except for short quotes, no part of this book

may be reproduced in any form or utilized in any form by any means, electronic or mechanical, including photocopy-

ing, recording, or by information storage or retrieval system, without written permission from the Urban Institute.

This report is part of the Urban Institutes Assessing the New Federalism project, a multi-year effort to monitor and

assess the devolution of social programs from the federal to the state and local levels. Alan Weil is the project director.

The project analyzes changes in income support, social services, and health programs. In collaboration with Child

Trends, Inc., the project studies child and family well-being.

The project has received funding from the Annie E. Casey Foundation, the W.K. Kellogg Foundation, the Robert Wood

Johnson Foundation, the Henry J. Kaiser Family Foundation, the Ford Foundation, the John D. and Catherine T.

MacArthur Foundation, the Charles Stewart Mott Foundation, the David and Lucile Packard Foundation, the

Commonwealth Fund, the Stuart Foundation, the Weingart Foundation, the McKnight Foundation, the Fund for New

Jersey, and the Rockefeller Foundation. Additional funding is provided by the Joyce Foundation and the Lynde and

Harry Bradley Foundation through a subcontract with the University of Wisconsin at Madison.

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration.

The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its

funders.

The authors would like to thank John Holahan, Joshua Wiener, Steve Zuckerman, and Alan Weil for their valuable comments

on earlier drafts.


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Contents

State Case Studies on Competition and Its Effects on the Poor 1The Importance of Health Care Markets for the Poor 2Study Methods: Site Visits to Representative States 4

Alabama: Dominated by Blue Cross/Blue Shield 11The Insurance Market and Managed Care 11Provider Markets 14State Regulation of Health Care Markets 15

Access, Cost, and Quality for the Low-Income 15

New York: Managed Care Growth and Deregulation 17The Insurance Market and Managed Care 17Provider Markets 19State Regulation of Health Care Markets 21Access, Cost, and Quality for the Low-Income 22

Texas: Uneasy Acceptance of Market Change 25The Insurance Market and Managed Care 25Provider Markets 27

The Role of Large Buyers 29State Regulation of Health Care Markets 29Access, Cost, and Quality for the Low-Income 31

Florida: Consolidation and Conversion 33The Insurance Market and Managed Care 33Provider Markets 35The Role of Large Buyers 36State Regulation of Health Care Markets 36Access, Cost, and Quality for the Low-Income 38


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HEALTH CARE MARKET COMPETITION IN SIX STATES: IMPLICATIONS FOR THE POORvi

Massachusetts: A Slow Starter Catches Up 39The Insurance Market and Managed Care 39Provider Markets 41The Role of Large Buyers 43State Regulation of Health Care Markets 44Access, Cost, and Quality for the Low-Income 45

Minnesota: Market Reliance, with Checks and Balances 47The Insurance Market and Managed Care 48Provider Markets 50The Role of Large Buyers 50State Regulation of Health Care Markets 52Access, Cost, and Quality for the Low-Income 54

Conclusion: Market Change, State Policy, and Access for the Poor to HealthCoverage and Care 55

Increased Insurance Coverage from Decreased Prices 56Access and Quality under Price Competition 57Declines in Access to Charity Care 58

References 61

Notes 67

About the Authors 69


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State Case Studies on Competitionand Its Effects on the Poor

ealth care competition has arrived. In the late 1990s, this observation hasbecome a truism. Market changes have important effects for all con-sumers of health care but may especially affect traditional access to carefor the low-income population.

The stimulus for market change has been buyers demands for less expensive

health coverage and care. In insurance markets, managed care is displacing traditional,free-choice-of-provider indemnity coverage. Indemnity plans retrospectively paidprovider-set charges or costs for almost all physician-ordered services from almostany provider. Managed care plans instead use selective contracting to negotiate priceand other terms of service in advanceand can also reduce utilization in variousways. Growth in managed care, prospective payment by Medicare and Medicaid pro-grams, and increasing medical capabilities to replace inpatient with outpatient careall have contributed to substantial excess capacity for hospital and specialist physicianservices in many markets. Ample supply has increased buyers leverage over sellers inmany areas.

In provider markets, professional and nonprofit determinations of resource allo-

cation and prices are therefore giving way to price discounting to compete for healthplan business and acceptance of fee-for-service Medicare and Medicaid payment lim-its. This price pressure is in turn stimulating hospital budget cutting, along withdownsizing, consolidation into larger provider entities, and conversions of ownershipstatus.

Doctors and hospitals, insurers and health plansall sellers of services areincreasingly having to compete on price as well as quality and amenities, and all havereorganized themselves to do so. Insurers and health plans are growing or mergingso as to serve wide-flung employer group customers, achieve economies of scale, andafford expensive information technology. The former cottage industry of solophysician practices and independent, unaffiliated hospitals is also giving way to larger

H


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HEALTH CARE MARKET COMPETITION IN SIX STATES: IMPLICATIONS FOR THE POOR

2

groupings. Corporate structures are displacing professional ones, and for-profit orga-nization is growing relative to nonprofit, both for health plans and hospitals.Nonprofit missions and professional norms remain very important, yet undervigorous price competition, nonprofit behavior necessarily comes to resemble that offor-profits. Markets serve those who can afford to purchase services, so the effect onlow-income people is a concern, especially if competition erodes the cross-subsidiesthat have financed their access to care.

This paper describes market shifts and state market-oriented policies, focusing onhow they affect health coverage and care for the poor as of the mid- to late 1990s, aperiod that has seen dramatic increases in the competitiveness of health financing anddelivery (Ginsberg et al. 1996). This section explains the issues of importance for thepoor and describes our case study methods. Six individual state case studies follow.The final section presents conclusions from the states experience and suggests whatremains to be learned. Related reports by Urban Institute authors provide moredetail on the specific issues of Medicaid managed care (Holahan et al. 1998, Hurleyand Wallin 1998, Zuckerman et al. 1997), insurance regulation (Blumberg andNichols 1995), and effects on safety net providers (Norton et al. 1998).

The Importance of Health Care Markets for the Poor

Markets for health care financing and delivery, as influenced by state policies,matter to the poor as well as the population at large: First, they may affect the extent

of enrollment in public or private health coverage. Second, they may affect the accessor quality of care under Medicaid or other coverage for the poor. Third, they mayaffect access to care for the uninsured poor, especially charity care provided by hos-pitals. The purpose of this paper is to begin to examine these three issues throughour case studies.

Extent of Health Care Coverage

Health coverage is a key concern because it is the central social mechanism bywhich people obtain health care and exercise consumer sovereignty. States might bemore willing to expand enrollment in Medicaid and similar public programs wheremarket developments increase use of managed care and lead to lower health care

costs. Even outside managed care, states may be able to achieve savings on fee-for-service payments where managed care and excess supply have reduced market pricesor helped change patterns of utilization.

In the private sector, more employment groups might also buy coverage for morepeople because competition and managed care have lowered prices relative to pastindemnity coverage and have reduced the annual rate of growth in premiums, espe-cially for big buyers. Effects on private coverage, including managed care plans andself-insurance, are very important for the poor and near-poor; it is easy to overlookhow many have private coverage because state programs are explicitly targeted topoor people. Nationally, private plans cover 22 percent of the poor (below the fed-eral poverty level [FPL]) and 56 percent of the near-poor (100 to 200 percent of

poverty)thus exceeding the number covered by Medicaid.1


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3HEALTH CARE MARKET COMPETITION IN SIX STATES: IMPLICATIONS FOR THE POOR

THE URBANINSTITUTE

On the other hand, slowed price inflation may make little difference to privatebuyers. The impact depends on the responsiveness of demand to price change (i.e.,the elasticity), which seems to be relatively low, particularly as insurance offeringshave shifted from patient-driven free choice of providers toward more organized sys-tems of care. Moreover, as part of economizing, competition has also encouraged thespread of self-insurance and experience rating, even into relatively small employmentgroups. The resulting fragmentation of risk pools isolates higher risks, making theircoverage more difficult and expensive to obtain. Lower-wage workers are dispropor-tionately concentrated in small employment groups and retail and service industries,which have higher rates of uninsurance (Nichols et al. 1997).

Effects on Access and Quality under Competition

The operations of markets for medical and insurance services also matter for thepoor if, holding prices constant, they improve access and quality. The general princi-ple is that effective quality-price competition could increase the availability of good,cost-effective services, whereas oligopoly or monopoly may reduce it. Moving frompublicly administered indemnity Medicaid to managed care plans may improve effec-tive access to care, particularly in places where provider participation rates were lowbecause of payment levels and other aspects of public administration.

Organized systems of prepaid care also have the potential to improve quality ofcare, especially compared with episodic access to emergency rooms for people whohave not developed a continuing relationship with a primary care provider. Otherqualitative advantages may also result from new management, from guidelines to

more oversight of practice, depending on the systems applied. Moreover, where atraditional safety net hospital faces new competition for patients within a plan, it mayprovide better, more patient-oriented care than one whose funding is guaranteed andwhose patients have few alternatives. It may also make improvements to attract refer-rals from community physicians.

However, there is a possibility that states may use the direct budgetary controlinherent in managed care to overeconomize. After contracts are awarded, publicmanagers are insulated from day-to-day allocative decisions, and political account-ability for any cuts in care may be attenuated. Plans themselves may economize inap-propriately in provider contracting, payment levels, utilization controls, and otherwaysdepending on the effectiveness of public oversight and quality competition for

patient enrollment or provider participation.

Effects on Uninsured Access

The nature of competition affects the ability of hospitals to serve those who lackinsurance and are too poor to pay for care out of pocket. In a price-competitiveworld, supplying a disproportionate share of uncompensated care can be a significantcompetitive disadvantage. When hospitals are price takers rather than price setters,they cannot so readily earn the net revenues needed to cross-subsidize care. Safetynet facilities with a relatively smaller share of paying patients seem especially vulner-able to pressure. They may also find themselves excluded from managed care net-works. Pressures on hospitals to economize may also limit state enforcement of the


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traditional duty of nonprofit providers to provide charity care. Alternatively, to theextent that competitive pressures increase provider efficiencies, charity care couldbecome cheaper to cross-subsidize.

Another market phenomenon is that some hospitals, as a result of consolidationor of quality reputation, may become indispensable for managed care plans to coverin order for plans to provide competitive access in an area. Such hospitals can use thismarket power to secure patient volume and earn net income to cross-subsidize theindigent as part of their mission. This does not mean that such institutions will nec-essarily be able to provide more charity care than before price competition, only thatthe safety net function will be better protected than it otherwise would be.

We assess these issues through case studies of six representative states.

Study Methods: Site Visits to Representative States

This reports findings on state policy and health care competition come fromgeneral case studies of health care for low-income people undertaken for the UrbanInstitutes broader Assessing the New Federalism project covering 13 states(Kondratas et al. 1998).2 Six states experience is described in the next sections.These states were selected to represent four types of markets, on the basis of theduration and extent of managed care development as well as the character of providerresponses to managed care and other pressures.

Characteristics of the Site-Visit States

The 13 site-visit statesAlabama, California, Colorado, Florida, Massachusetts,Michigan, Minnesota, Mississippi, New Jersey, New York, Texas, Washington, andWisconsinwere originally selected to present a balanced view of state health andwelfare activity and its impact on low-income families. Selection criteria includedsocioeconomic and political characteristics, availability and generosity of publiclysupported health and welfare programs, and geographic diversity.

The site-visit states span the range of state demographics (table 1). Mississippi isless than one-third urbanized, for example; New Jersey is 100 percent; and thenation as a whole, 80 percent. Urbanized areas have traditionally been the first to

develop price-competitive health financing and delivery markets. The states alsostraddle the national norms in per capita income and poverty rates.

The site-visit states also show a representative variety of provider supply (table 1),a major factor in competitive development. Mississippi and Alabama have low ratiosof medical specialists per 100,000 population (at 108 and 149, respectively, versus195 for the country as a whole), whereas New York and Massachusetts have veryhigh ratios (at 314 and 336, respectively). Similar diversity applies for the ratio ofhospital beds to population. A high supply of specialists and hospitals facilitates theformation of competitive networks of providers.

In terms of their insurance markets, the states run the gamut of penetration byhealth maintenance organizations (HMOs) and preferred provider organizations


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Table 1 Demographics and Measures of Supply, Site Visits

State Percent

Metro-

politan

Popu-

lation,

1996a

Per

Capita

Income,

1996b

Poverty

Rate,

1995c

PCPs*

per

100,000

People,

1995d

Special-

ists** per

100,000

People,

1995d

Percent

HPSA***

Counties

(whole or

part),

1995d

Percent

Public

Hospital

Beds,

1995e

Percent

Non-

profit

Hospital

Beds,

1995e

Percent

For-Profit

Hospital

Beds,

1995e

Hospital

Beds per

1,000

People,

1995d

Hospital

Admis-

sions per

1,000

People,

1995f

US

AL

CA

CO

FL

MA

MI

MN

MS

NJ

NY

TX

WA

WI

79.7

67.7

96.6

81.2

92.9

98.5

82.4

69.7

31.4

100.0

91.8

84.2

82.8

67.7

$24,231

20,055

25,144

25,084

24,104

29,439

24,810

25,580

17,471

31,053

28,782

22,045

24,838

23,269

13.8

20.1

16.7

8.8

16.2

11.0

12.2

9.2

23.5

7.8

16.5

17.4

12.5

8.5

26.6

25.5

27.8

34.0

26.3

16.5

21.9

45.5

24.6

17.3

18.1

24.9

39.4

35.1

194.8

149.0

197.3

180.1

183.1

335.7

176.4

177.6

107.6

241.6

313.5

152.8

170.1

168.1

63

88

90

83

91

57

72

40

84

67

76

58

90

72

17.0

35.2

17.0

19.8

15.3

8.8

7.0

42.8

29.0

7.5

13.8

18.4

23.3

3.9

64.6

38.7

58.7

62.0

44.2

82.4

89.1

35.6

67.6

85.8

77.4

41.6

63.4

91.2

11.7

19.7

17.2

11.9

34.0

2.2

0.4

13.4

0.6

0.7

2.8

28.8

3.6

0.5

3.4

4.6

2.5

2.5

3.6

2.9

3.0

5.3

3.9

3.6

4.1

3.2

2.2

3.3

127

160

102

102

135

133

122

113

157

138

138

119

96

114

*PCPs are nonfederal active patient care physicians listing general practitioner or general familypractitioner as their primary activity.

**Specialists include all nonfederal active patient care physicians who self-designated medical, surgical, andother specialties as their primary activity.

***Health Professional Shortage Areas.Hospitals are nonfederal general medical surgical hospitals, including childrens hospitals.

a. U.S. Department of Agriculture, Economic Research Service, Rural Economy Division. PopulationChange, 1990-1996 (Unpublished table). Washington, DC, 1996.

b. U.S. Department of Commerce, Economic and Statistics Administration, Bureau of Economic Analysis.Per Capita Personal Income by State and Region, 1996, State Per Capita Personal Income Growth NewsRelease. Washington, DC, April 1997.

c. U.S. Department of Commerce, Bureau of the Census, Housing and Household Economics StatisticsDivision, Web site . Table B: Percent of Persons in Poverty by State, 1993,1994, 1995. Washington, DC, September 1996.

d. The 1997 Area Resource File.e. American Hospital Association Annual Survey, 1996.f. American Hospital Association. Hospital Statistics: Emerging Trends in Hospitals, 199697 edition.

Chicago, IL, 1996.


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(PPOs) (table 2), the forms of health financing that are central to competitive devel-opments. HMO penetration is highest in California, at 42.6 percent of the market,and lowest in Mississippi, at 1.9 percent; PPO penetration also varies widely, thoughthe numbers are less credible because they include only state-based PPOs, not mul-tistate ones. The states differ greatly in the extent of uninsurance as welland onseveral measures of medical spending (table 2).3

Six State Case Studies of Markets

Across the country, states are at various evolutionary stages of price-competitivemarkets. This does not mean that all are on the same path, just that some have moreexperience with competitive developments than others. For example, advanced mar-kets are characterized by high HMO penetration, long-standing experience with

managed care, and major provider restructuring in response. Both state policymak-ers and coalitions of private employers may be active in seeking to influence marketdevelopment and operations. State policymakers tend to address more advanced mar-ket concernssuch as whether, to what extent, and how to manage or regulate man-aged care, health care mergers, and nonprofit conversions.

At the other end of the spectrum lie states that have little experience with man-aged care, especially with HMOs and organized provider groups. Indemnity cover-age and lightly managed care (with some utilization controls) predominate. Thestates may lack large employment groups other than the state to provide a ready mar-ket, and state policy may not facilitate development. A relative shortage of primarycare physicians and a dearth of large physician groups also make it difficult for health

plans to form networks. Public hospitals may have an unusually large share of themarket, which also inhibits networking among private actors.

Most states lie in the middle of the spectrum, either just embarking on seriouscompetition or at a somewhat more advanced stage with a longer tradition of pricecompetition and provider reaction to it. One can argue whether a state is at the loweror higher end of the middle, but the middle range is generally distinct between theextremes of high and low. Table 3 groups the site-visit states by these marketcharacterizations.

The following sections discuss the six states asterisked in table 3, in that order.The states were selected to illustrate the constraints and opportunities created bymarket developments at different stages. They also reflect the range of policies pur-

sued by states with different circumstances and political-programmatic preferences.

Alabama is at an early stage of development. Blue Cross/Blue Shield dominatesinsurance, with rather traditional coverage instead of heavily managed care.Competition from HMOs is just getting under way. The state has a very large pov-erty population and a relatively small Medicaid program, and it relies heavily onpublic provision of care by hospitals and public health nurses.

New York is a large state with a long tradition of extensive regulation in healthcare. State action has been particularly important to developments there, notablyhospital deregulation implemented in 1997 and the states desire to move rapidly toMedicaid managed care, given its high levels of spending on acute care in that pro-

gram (table 2). New York illustrates how rapidly markets can shift. There, thor-


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oughgoing market change is just beginning, as hospital rates were deregulated onlybeginning in 1997, but hospital consolidation began quickly after deregulation. Also,the extreme concentration of its poor populations poses special problems for the safe-ty net.

Texas still has relatively low HMO penetration (table 2), owing to strong resis-tance from patients who value choice and physicians who value independence. As aresult, Texas has very strong regulation of managed care organizations, testing the

limits of what federal Employee Retirement Income Security Act (ERISA) preemp-

Table 2 Insurance and Health Care Spending, Site-Visit States

State Percent


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tion allows states to regulate. The state has a very high rate of poverty and an evenhigher rate of uninsurance, and it relies heavily on public hospitals. For-profit com-petition with nonprofits is extremely vigorous.

For-profit hospital competition and hospital consolidation are notable features ofFloridas markets. Within the HMO market are many plans that compete forMedicare beneficiaries, drawn by the states very high indemnity Medicare spending(table 2), which sets the HMO capitation allowance. Florida has unusual local pro-

grams of third-party payment for safety net care.

Table 3 States by Stages of Market DevelopmentStage State Comments

Very early

Early

Intermediate

Advanced

Alabama*

Mississippi

Michigan

New Jersey

New York*

Texas*

Colorado

Florida*

Massachusetts*

Washington

Wisconsin

California

Minnesota*

Low in HMOs, more PPOs (though much within dominant Blues plan);rural, low-income; many public hospitals, low physician supply

Very low in HMOs/PPOs, low in insurance coverage; heavily rural, verylow income, few large employers; low physician supply

Dominant employment groups do plan-specific cost containment, not mar-ket development; HMOs low

HMO growth explosive in 1990s after deregulation, Medicaid managedcare; few for-profits; some hospital consolidation, not closures; charitypool for hospitals

Hospital rate regulation impeded price competition until 1997; large HMOexpansion under way; hospitals forming networks; charity pool for hospitals

Low in HMOs/PPOs; strong Blues plan, fee-for-service provider tradition;strong regulation of managed care; public hospital reliance, low physiciansupply

Very high in PPOs, not HMOs; Denver hotbed of competition

High HMO penetration, many HMO mergers; much realignment amonghospitals

Deregulated hospitals starting in 1992; very high HMO penetration, tradi-tionally dominant Blues plan in decline; two huge hospital entities forming;price competition less vigorous than in some other areas

Low in HMOs/PPOs, although Seattle very MCO-oriented; very low hospi-tal supply and utilization, also low medical spending

High HMO penetration, generally mature managed care market except inrural areas; state actively promotes competition

Long-standing HMOs and PPOs, huge market share for Kaiser; large rolefor physician groups, often capitated; state buying pools and oversightvery active

Minneapolis/St. Paul often said to be most advanced market in country;HMO penetration began in 1950s, now high; state and private buyersgroups actively promote competition; three large integrated health caresystems dominate Twin Cities and region

Note:Within stages, states are in alphabetical order; six marked states (*) are presented as case studies in thispaper.


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Alabama: Dominated by BlueCross/Blue Shield5

Alabamas health care insurance and delivery markets are shaped by BlueCross/Blue Shield of Alabama (BCBSAL), which insures or administersbenefits for almost three-quarters of the states residents. Some complainthat this near-monopoly power has kept premiums higher than need be,

but HMOs to date have had difficulty entering the market because BCBSAL canundercut their prices, and per capita costs are below national averages. The Bluesdominance has helped limit insurance reform efforts and created special regulatorystatus for the plan.

The modest presence of HMOs in Alabama has left hospital and physicianmarkets untouched by much of the competitive pressure faced by health systemselsewhere around the country. As a result, there is no immediate shortage ofuncompensated care. Yet some early signs of market evolution are present: HMOmembership continues to grow, some providers are creating physician-hospitalorganizations (PHOs), and hospitals are merging to some extent. Perhaps mostimportant, BCBSAL itself has taken initial steps to enter the managed care arena.

The Insurance Market and Managed Care

BCBSAL

Referred to by some as a benevolent dictator and even a benevolent mon-ster, BCBSAL insures or is the third-party administrator for fully 70 percent of thestates privately insured population. The insurer has fostered its market power bymaintaining good relationships with providers (hospitals are paid on a discountedcharge basis, and physician payments are considered generous); maintaining broadchoice of providers and rich benefits (low copayments) for consumers; and offering

acceptable, if not necessarily low, rates to employers. BCBSAL apparently has not


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HEALTH CARE MARKET COMPETITION IN SIX STATES: IMPLICATIONS FOR THE POOR12

leveraged its substantial market power to obtain large discounts from providers, how-ever, and has been accused of keeping prices unnecessarily high. Critics say BCBSALhas little incentive to lower health care utilization because 75 percent of its business

is third-party administration and it is paid a fee for each claim processed (AHL9/25/96; AHL 3/21/97). Nevertheless, as HMOs have grown in number,BCBSAL has become more price-conscious to discourage further entry of new plans.

BCBSAL has taken steps toward managing care. The insurer runs a small HMOwith approximately 1,000 enrollees, but most of its management of health care isembodied in its PPO and the policies it sets. Its PPO is largely responsible forAlabamas high PPO penetration rate, 34.5 percent in 1994 (HIAA 1995). TheBCBSAL PPO includes all but 5 percent of the states physicians. At first, all physi-cians were eligible to join; now that the panel is closed, some physicians who origi-nally chose not to sign up are suing BCBSAL to be included. While the PPO maynot reap significant enhanced efficiencies because of the broad physician participa-

tion, it does encourage referrals to selected specialists.6

In perhaps its most controversial (in the eyes of providers) cost-cutting measure,BCBSAL placed a moratorium on payments to new outpatient facilities such asambulatory surgi-centers and radiology centers in 1996 (AHL 11/13/96). BCBSALdecided to refuse reimbursement to any newly constructed facilities because it paysthem on a cost basis; thus, any new construction increases reimbursements. The newpolicy was predicted to result in lawsuits, as some proposed facilities already hadreceived a state certificate of need (CON).

Some observers noted that BCBSAL can selectively lower its rates to ward offnew entry into the market. One example is the way it won the business of theAlabama Healthcare Council, a purchasing coalition of more than 20 large employ-

Summary StatisticsAlabama and U.S. Total

Percentin MetroAreas,1996

PerCapitaIncome,1996

PercentLiving inPoverty,1995

PercentHPSACounties(whole orpart),1995

Special-ists per100,000,1995

HospitalBeds per1,000,1995

Percentof Bedsin PublicHospitals,1995

Percentof Bedsin For-ProfitHospitals,1995

HospitalAdmis-sions per1,000,1995

Percentof Non-elderlyWho AreUnin-sured,199495

Percentof Non-elderlyBelow200%FPL WhoAre Unin-sured

Percentof Non-elderlyEnrolledinMedicaid,199495

Percentin HMOs,Total,1996

PercentofMedicaidClients inMCOs,1996

Percentin State-HQdPPO,1994

PerCapitaHealthCareSpend-ing, 1994

PerCapitaMedicareSpend-ing, 1995

PerCapitaMedicaidAcuteCareSpend-ing, 1996

AL

US

67.7

79.7

$20,055

$24,231

20.1

13.8

88

63

149

195

4.57

3.44

35.2

17.0

19.7

11.7

160.2

126.6

AL

US

16.9

15.5

28.5

26.7

16.9

12.2

08.6

24.0

11.4

40.1

34.5

$2,977

$3,068

$4,895

$4,750

$1,495

$1,906

Sources:See tables 1 and 2.


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THE URBANINSTITUTE

ers with 100,000 employees, by offering a 20 percent premium discount. Observerssaid that BCBSALs sizable assets and reserves and low overhead allow it to risk a lossto protect its market share (AHL 9/25/96, 3/21/97).

HMOs

According to some observers, HMO penetration is slowed not only by the effortsof BCBSAL but also by anti-HMO sentiment among the public and the press andthe relatively rural nature of much of the state, which inhibits HMO development.Despite these obstacles, HMOs have steadily gained members and currently enrollabout 16 percent of the privately insured population (AHL 2/3/98). The numberof HMOs is increasing as well, despite some plan exit (e.g., Foundation and PCA).As of October 1996, 13 companies (mostly out-of-state) held 15 HMO licenses, and

another 6 organizations were seeking HMO licensure.HMOs in the state are struggling financially for several reasons. First, to compete

with BCBSAL, they have to maintain low premiums, which is dif ficult because theyhave not been able to secure hospital discounts in the face of BCBSALs dominance.Physicians often are not willing to accept rates lower than BCBSALs because theBCBSAL contract requires physicians to offer the Blues the lowest rates negotiatedwith any party, or BCBSAL can drop them from its panel. In addition, becauseBCBSAL sells a rich benefit package, HMOs have offered a similarly generous pack-age. Further, because of the priority Alabamians place on choice, HMOs have hadtrouble attracting new enrollees in large numbers. To address this problem, at leastone HMO has expanded its choice of hospitals.

Despite the HMOs unsuccessful bid for the Alabama Healthcare Councils busi-ness, many viewed the process as an indication that employers are interested inHMOs and that competition is slowly mounting. Some predict that employers willbegin to seek savings more vigorously by limiting provider choice via managed care.In addition, a recent state survey of HMO customers found higher levels of satisfac-tion than the National Committee for Quality Assurances nationwide survey found(AHL 2/3/98). Others in the state noted that the future of capitated managed caredepends on whether BCBSAL itself moves in that direction. BCBSAL did, in fact,introduce a health plan that features a limited network of primary care gatekeepersin 1997. Some believe BCBSALs initial steps to reinvent itself as a managed careplan foreshadow heated managed care competition in the state (AHL 9/25/96).

Medicaid Managed Care

In spite of the limited HMO infrastructure, Alabamas Medicaid program hasmoved toward managed care. The state has incrementally introduced managed careprograms for targeted populations, without relying on commercial HMOs. Instead,it relies largely on primary care case management, such as its Section 1915(b) waiverprogram for pregnant women operated in two-thirds of all counties. The programhas been successful in attracting physicians to participate and is credited with increas-ing prenatal care utilization and lowering the infant mortality rate. Under another1915(b) waiver, Alabama will implement primary care case management in 26 coun-ties for all Medicaid recipients except the dually eligible.


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THE URBANINSTITUTE

Alabama suffers a physician shortage in rural areas, and specialists are particularlyrare. Fully 88 percent of Alabamas counties are federally designated as whole or par-tial Health Professional Shortage Areas (HPSAs). One response has been to encour-age the practice of mid-level practitioners. For example, in 1996, nurse practitionersand certified nurse-midwives were authorized to write prescriptions under a physi-cian sponsor (AHL 2/23/96). In addition, new training programs for nurse prac-titioners and physician assistants have emerged in Alabama.

State Regulation of Health Care Markets

The Department of Insurance regulates the insurance industry through fairly

standard measures. Although insurance companies have to file premiums with thestate, the Department cannot disallow increases, only require justification. TheDepartment has no authority over BCBSAL because it is granted special status as anonprofit health care service plan (AHL 3/21/97). Of course, the Departmentalso has no authority over self-funded ERISA plans, which abound in the state.

Managed Care Regulation

HMOs are regulated by both the Department of Insurance (on issues of solvency)and the Department of Health (on issues of quality). Policymakers have become con-cerned about the states limited regulatory authority over the increasing number ofPHOs. To monitor quality of HMOs, the Department of Health requires tracking of

20 HEDIS (the Health Plan Employer Data and Information Set, from the NationalCommittee for Quality Assurance) indicators, with additional indicators for Medicaidand Medicare clients. The state also has begun an annual HMO customer satisfac-tion survey. HMOs are required to pay $8,500 each to participate and are inducedto comply under an existing law that requires HMOs to provide accurate and con-sistent information (AHL 2/3/98). The Department of Insurance noted that itmonitors HMO solvency carefully, because many HMOs are financially marginal.HMOs charge that the regulatory environment places them at a competitive disad-vantage with BCBSAL, which is not subject to the same requirements.

In addition, Alabama has enacted legislation to counter potential limits onpatient care imposed by managed care. Recent laws require insurance companies to

provide direct access to obstetricians/gynecologists (ob-gyns), 48-hour hospital staysfor maternity care, and mammography screenings. Also, Alabama has an any willingprovider law for pharmacies. BCBSAL challenged the law in court and the Blues arenow exempt from the law, though other insurers must abide by it.

Access, Cost, and Quality for the Low-Income

Low-income Alabamians may have some difficulty obtaining insurance, butprobably no more than in other parts of the country. Alabamas rate of uninsuranceis only slightly above the national average, at about 17 percent, and down from


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199092, when it was almost 20 percent (Liska et al. 1998). Improved coveragetends to lessen the potential impacts of market change on the poor, because fewerpeople will require uncompensated care. Few reforms have been undertaken to fur-ther improve the insurance coverage rate, however, and two legislators noted littlepublic or provider pressure to tackle the issue.

Access to care seems a more pressing concern, given the states large number ofphysician shortage areas. Many residents, low-income and high-income alike, facephysical access problems because of physician scarcity and long distances to facilities.However, the low-income population may have more trouble obtaining transporta-tion and may be less likely to receive care (or care of equal quality) where they mustcompete for physicians time with better-paying patients. Furthermore, in rural areas,there may be cause for concern about quality if health care professionals must delivercare beyond their scopes of practice.

As mentioned above, state officials do not appear concerned about any potentialnegative ramifications of for-profit takeover activity in the state. If a large percentageof hospitals were to convert to for-profit status, however, the norm for uncompen-sated care provision among hospitals could decline. Furthermore, without oversight,community assets accumulated over years of tax exemption could fall into privatehands.

Marketplace changes do not appear to be reducing uncompensated care provi-sion at this time. The generosity of BCBSALs rates has limited cost- and utilization-control pressures on hospitals, so facilities have maintained enough cushion in theiroperating margins to preserve some level of charity care. However, it is not clear how

adequate traditional levels of uncompensated care have been, relative to need.


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New York: Managed Care Growthand Deregulation7

The New York health care marketplace is changing dramatically, primarily asa result of growth in managed care and hospital rate deregulation. Theregulatory environment, especially the rate-setting system and the CONrequirements, slowed the entrance of managed care into New York. New

York deregulated hospital rates beginning in January 1997, and as a result, competi-tion and consolidation in the hospital marketplace have accelerated. Market changesbrought about by hospital deregulation pose both hazards and opportunities formanaged care plans in New York. So far, the poor have been protected by the con-tinuing breadth of Medicaid eligibility and the states unusual charity care pool.


HMOs

HMOs have grown rapidly in New York at the expense of traditional indemnity

plans. As of 1996, about one-third of New York residents were enrolled in HMOsor PPOs, up from 24.3 percent in 1994. There are currently 36 licensed HMOs,mostly for-profits.

There were perhaps 10 HMOs in New York in the 1980s, when regulations wereadopted acknowledging the legal authority to license for-profit HMOs, and thenumber of HMOs exploded. In addition, HMO growth was fueled by the statesauthorization in 1984 of prepaid health service plans (PHSPs) to serve Medicaidclients exclusively. Their number is capped statutorily at 20 statewide.

While the hospital rate-setting system applied to HMOs, they were also grantedthe authority to negotiate alternative payments (subject to state approval). FewHMOs exercised the option to negotiate rates before 1988, when the rate-setting


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system converted to diagnosis-related groups (DRGs). Through the early 1990s, thelevel of HMO-negotiated deals increased significantly as they sought to recapture the

advantage of per diem payments and excess hospital capacity. Interviewees saidHMOs believed that states without hospital rate setting offered better cost-cuttingopportunities, in part because rate-setting states initially controlled costs relative tounregulated fee-for-service markets. But as advances in managed care reduced costsin unregulated markets, rate-setting states began to appear to have high costs andexcess capacity. Thus, HMOs now are poised to take advantage of New Yorkssubstantial excess hospital capacity, which improves plan leverage in bargaining fordiscounts. Furthermore, shaky 1997 financial performances by two of the statesleading insurers, Oxford Health Plan and Empire Blue Cross/Blue Shield, may offerother HMOs an opportunity to expand enrollment (BNA 4/27/98).

On the other hand, certain factors act against the growth of HMOs in New York.

First, because HMOs were the only insurers with authority to deviate from state-sethospital rates, deregulation could be seen as removing an advantage for HMOs, nowthat HMO enrollment is large enough to entice hospitals to accept below-marketrates. Second, the state strictly regulates HMOs, some believe disproportionatelycompared with regulation of other health-insuring entities. Indeed, one response tothe level of regulation of HMOs, and a third threat to their growth, is the spread ofother insurance products that are not regulated, such as PPOs. Such loose forms ofmanaged care may yield lower overall system cost reductions than traditional HMOenrollment would.

A final threat to the growth of HMOs is hospital consolidation and integration,which may increase the market power of hospitals vis--vis health plans. Hospitals are

consolidating rapidly in the state, as discussed further below. In addition, some hos-

Summary Statistics New York and U.S. Total



















NY

US

91.8

79.7

$28,782

$24,231

16.5

13.8

76

63

313.5

195

4.1

3.44

13.8

17.0

02.8

11.7

138

126.6

NY

US

16.8

15.5

27.3

26.7

14.7

12.2

30.9

24.0

23.5

40.1

3.8

$3,743

$3,068

$5,322

$4,750

$3,146

$1,906



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THE URBANINSTITUTE

pitals and physicians may compete directly with HMOs through integrated deliverysystems (IDSs), authorized by the New York Health Care Reform Act of 1996(NYHCRA). These plans are favored by hospitals primarily as a way to protect theirMedicare market share as seniors move into risk HMOs. IDSs will be regulated likeHMOs, but they may have more lenient solvency provisions. It remains to be seenhow provider-sponsored insurance plans will affect the HMO market.


The commercial HMOs have traditionally participated in Medicaid because theyfaced a 9 percent penalty applied to hospital charges if they did not. In the 1996Medicaid procurement process, commercial HMOs accepted what they believed tobe relatively low Medicaid rates in order not to be precluded from the Medicaid busi-

ness and face the 9 percent penalty. When the penalty was lifted under rate deregu-lation in 1996, some commercial HMOs, including PruCare, MVP, Travelers, andIH, exited the Medicaid market or left specific counties. Other HMOs limited enroll-ment in some counties and refused to expand into new ones. A legislatively com-missioned study of Medicaid HMO rates concluded that rates were too low, and thestate raised them by 2 percent in New York City and 7 percent upstate. However,some HMOs argue that Medicaid rates and increased quality-monitoring require-ments are still unreasonable. Plans are also said to be frustrated by the cumbersomeNew York system of contracting with individual counties.

Some observers fear that commercial HMOs will abandon the Medicaid market.The state approved two additional rate increases in August 1997, one just imple-

mented in April 1998. These increases provide bonuses to plans that expand enroll-ment into new regions. Whether these incentives will improve plan participation,however, remains to be seen. Recently, a number of PHSPs appear to be expandingand will perhaps provide an alternative to commercial plans. There is still concernover the exit of commercial plans or access to primary care in areas of the city wherethere are no PHSPs.

Provider Markets

HospitalsHow the managed care market evolves, and whether HMOs are able to reduce

health care costs in the state, depend to a great extent on the changes in the hospi-tal market under deregulation. While the New York state hospital rate-setting systemappeared to control costs relative to fee-for-service systems, it is widely believed thatthe states system now has high costs relative to more price-competitive markets. Inaddition, some believe the state has substantial excess hospital capacity, funded byloans from the Federal Housing Authority under the Hospital Mortgage InsuranceProgram (AHL 11/22/96). This increase in inpatient capacity runs counter todevelopments in other states, where more outpatient clinics and surgical centers arebeing built.


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The perception that New York has high costs and capacity relative to other mar-kets led to the enactment of NYHCRA in 1996 to end the hospital rate-setting sys-tem. Another contributing factor was that, as HMO market share grew, about 25percent of hospital services were paid for outside of the rate-setting system. It wasbelieved that competition among insurers and HMOs would drive down hospitalcosts, admissions, lengths of stay, and number of beds. Officials expected that a num-ber of hospitals would close and that most hospitals would reduce capacity.

Indeed, hospital deregulation and the large amount of hospital debt probablyintensified hospitals interest in consolidation to develop bargaining power withHMOs. Two patterns emerge from the many postderegulation mergers and affilia-tions: the development of hospitals with considerable market power in some parts ofthe state, and the increasing power of academic medical centers. State officials andother interviewees suggested that merger activity outside of New York City couldbegin to present serious problems for competition in the health care market.Interviewees believed that in small cities, such as Newburgh and Poughkeepsie,mergers could result in a large number of monopolies, which could be a seriousproblem. In such cities, managed care plans would have to contract with the solelocal hospital, with little ability to negotiate prices and services. In addition, managedcare efforts to move care out of hospitals could be limited by hospitals with a local-area monopoly. In other markets, oligopolies could diminish access for low-incomepeople if competition between hospitals reduces their provision of charity care. InBuffalo, CGF Health System has only one serious rival: a multiprovider affiliation ofCatholic health care entities (AHL 2/4/98a). Another possibility is that there wouldremain many hospitals but only one large academic medical center (e.g., the Albany

Medical Center), which would be a critical piece of any managed care network oper-ating in that region.

New York City is a more complicated case. Many interviewees believed excesscapacity was so great that mergers have not threatened competition. Others believedthat because the mergers and affiliations were led by the largest and most prestigiousteaching hospitals, Mt. Sinai and New York Hospital, they could eventually threatencompetition. They argued that even in New York City, a large HMO could not com-pete successfully for a middle-class clientele without access to either the Mt. Sinai orNew York Hospital networks. The prestige of these hospitals networks gives themtremendous bargaining power, and they are expected to broker the process of down-sizing the New York City hospital industry. In 1997, they were actively affiliating

with community hospitals throughout Queens, Brooklyn, and the Bronx to feed thelarger academic medical centers. Most have preserved community hospitals as part oftheir systems, but referral patterns are changing.

Other hospitals in New York City are struggling. Average hospital margins werearound 1 percent in 1996, compared with a national average of 5 percent. A UnitedHospital Fund study concluded that New York City hospitals may soon experience acompetitive shakeout. Between 1995 and 1997, hospitals there saw changes inadmissions ranging from a 13 percent decline to a 6 percent increase. Two-thirds ofthe hospitals with the largest inpatient gains were located near hospitals with thelargest inpatient losses, prime candidates for consolidation. Municipal hospitals, largefacilities, and financially distressed hospitals fared worst. Furthermore, one-third of


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THE URBANINSTITUTE

the citys hospitals in 1996 depended on Medicaid for more than 50 percent of dis-charges, a potential vulnerability if Medicaid HMO enrollees are moved to otherhospitals.

Physicians

Physicians are also in oversupply in New York, compared with most of the rest ofthe country. This is particularly true of medical and surgical specialists. In 1997, NewYork had about 313 specialists per 100,000 population, versus 195 for the nation.Physician oversupply generally acts to the advantage of HMOs, allowing themincreased bargaining power.



The state strictly regulates HMOs. All HMOs must have open enrollment; theymust participate in the individual market; and they are subject to limits on preexist-ing condition exclusions. Plans also must detail for the state their bylaws, manage-ment and staffing plans, quality review procedures, grievance processes, and theadequacy of their provider networks.

A large state staff monitors HMO quality, and some observers consider its regu-

lations excessive. New York requires collection of HEDIS and other quality moni-toring data for both commercial and Medicaid enrollees and additional encounterdata for the Medicaid population. The state conducts annual surveys to review planstructures, processes, and medical records, and it has recently expanded its complaintinvestigation activities, including a new hotline.

The state also enacted a comprehensive Patients Bill of Rights in 1996 as theresult in part of efforts by consumer advocates and the Medical Society of the Stateof New York (MSSNY) to limit many managed care practices. The law applies tomanaged care plans and insurers, protects commercial and Medicaid enrollees equal-ly, and includes some provider protections as well.

The law prohibits gag clauses, which seek to bar providers from discussing

more expensive treatment alternatives with patients. It also requires continuity ofcare for people with chronic conditions and pregnant women whose providers leavethe plan. It defines procedures for standing referrals to specialists and permits spe-cialists to act as care coordinators for patients with chronic conditions. In addition,it grants out-of-network access to specialty care not available through the plan andsets a prudent layperson definition for payment for emergency services.

The law also requires disclosure of plan benefits, cost-sharing, provider rosters,referral and preauthorization procedures, access to specialty services, and, on request,guidelines for utilization review of specific conditions and compensation arrange-ments with physicians. Furthermore, it standardizes procedures for consumer appealsand grievances. The state also mandated due process protections for physician ter-


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mination. Finally, the access provisions of this law are extensive: Consumers musthave a choice of at least three primary care providers, subject to travel time and dis-tance restrictions, and plans must offer a sufficient number of specialists in all classesof licensed health professionals.

Despite its many provisions, some consumer advocates in New York did notendorse the law because it designated HMOs, rather than independent panels, as theultimate decisionmakers, and it did not mandate an out-of-network option or cover-age of experimental treatments. Legislation introduced and passed in the 1998 ses-sion addresses some of these perceived shortcomings, including independent review,a statewide managed care consumer assistance program, and an HMO malpracticeliability measure to allow enrollees to sue their health plans (BNA 2/2/98). ABusiness Council of New York report argued that the 1998 managed care bills wouldraise health care costs by billions of dollars and force thousands to go without insur-ance (AHL 5/6/98).

Antitrust Policy

The states review of hospital mergers is typical, not particularly activist. Plans formergers are announced and the state reacts to them. The State Department ofHealth will review only mergers that actually involve one entity taking over another,where the acquiring entitys board members exercise day-to-day control over thehospital. More of the mergers in New York state have been of a passive nature, wherethe entities come together to bargain with HMOs and to increase efficiency in pur-chasing but control of operations does not change. In the past, the state has tended

to accept mergers and joint ventures because it could control hospital rates throughthe rate-setting system and excess capacity through certificates of need. Now withderegulation, some fear the state may be left with too few competitors because of itspast decisions. Interviewees also felt that recent court rulings against the U.S.Department of Justice in antitrust suits constrain the states ability to credibly chal-lenge merger activity.

State antitrust officials were clearly frustrated with existing case law. While thestates position is deferential to the federal Department of Justice and the FederalTrade Commission, it was clear that the state Attorney Generals Office was moni-toring the merger activity taking place and assessing its possible consequences. Stateofficials said they would not go along if they thought there was significant anti-

competitive activity among state hospitals.


In 199596, 16.8 percent of New Yorkers lacked health insurance coverage,slightly more than the national average (Liska et al. 1998). Although employer-sponsored insurance is slightly below the national average (at 63.3 percent, com-pared with 66.1 percent), broader-than-average Medicaid coverage and the presenceof a state bad-debt and charity care pool seem to have protected low-income NewYorkers to some degree from the potential negative effects of marketplace change.

But there are concerns about whether this situation will persist.


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THE URBANINSTITUTE

Some fear that past antitrust decisions may have left insufficient competition inthe hospital market, especially in small cities. Monopoly power of combined entitiescould drive up costs and reduce access for those with low incomes. Where there areoligopolies, heated competition between hospitals could reduce the ability of each toprovide charity care.

In New York City, deregulation and consolidation may increase the marketpower of the more prestigious hospitals and enhance their ability to bargain withmanaged care plans, possibly achieving high enough rates to support current levelsof graduate education if they are so inclined and to continue their current levels ofcharity care. But other hospitals, especially public ones, will likely have less ability toprovide uncompensated care. Observers fear that a few small, highly competitivehospital networks will evolve that will provide only limited care for the poor and willexclude many of the nonprofit and public safety net hospitals, several of which arealready financially distressed. These latter facilities will not be able to compete for pri-vate patients. Without some intervention beyond the uncompensated care pools,they are likely to fail, given the amount of uncompensated care they will be forcedto bear. Some interviewees even say the large hospital chains will also be unable tocompete if they absorb this burden.

If New York hospitals continue to consolidate, managed care may have difficultycontaining costs. Health plans maintain that state regulation constrains their abilityto reduce the costs of health care. Health plans have already had to requestsubstantial rate increases because of adverse selection in the individual market undercommunity rating. Some are concerned that HMOs will not in the end serveMedicaid patients because of the low capitation rates and the high degree of man-aged care regulation. Others believe that there is such a large amount of capacity inthe system that low capitation rates will simply force HMOs to be even tougher bar-gainers with physicians and hospitals. In this scenario, at least Medicaid HMOs willremain viable and could expand operations. Medicaid beneficiaries would be served,but by essentially the same traditional providers.


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Texas: Uneasy Acceptance ofMarket Change8

The Texas HMO market is experiencing great upheaval: The number ofhealth plans is growing rapidly as new HMOs enter, even as others leave.A simultaneous consolidation trend is under way because overall profitshave been low. Plans are squeezing provider payments to compete better.

Providers are attempting to protect themselves from managed care by consolidating,contracting directly with employers, and attacking managed care politically.Physicians and consumer groups have won what may be the strongest managed careregulation in any state.

The Texas safety net is very important, as almost a quarter of Texans are unin-sured. For-profit acquisitions have stimulated market change and made nonprofitconversion a major topic of public debate. The state now has twice the national per-centage of for-profit hospitals. There are fears that hospital conversions and paymentcuts under managed care will reduce the supply of uncompensated care and injuresafety net providers, but as yet there is no evidence of major negative impacts on poorTexans.


Some 800 to 900 insurers compete in Texas, including a large Blue Cross/BlueShield plan (BCBST). Well over half of the market is estimated to be in self-insuredplans, including almost all large employment groups (IHPP 10/13/97).

HMOs

The number of HMOs has grown rapidly throughout the 1990s, most recentlybecause of expansions in Medicaid and Medicare managed care. Most HMOs are for-profit, and 41 percent are affiliated with an insurance company, often a national one.9


31/74


Another 26 percent of HMOs are aligned with a hospital. The state HMO associa-tion says that eight nonprofit HMOs operate in Texas, three of which are run by

BCBST, which is estimated to have 12 percent of the states managed care business.Interviewees considered competition among plans to be fierce.

HMO enrollment has also grown rapidly, to about 3.5 million at the end of1995, most under self-insured arrangements.10 In 1996, penetration was around 13percent of the total state population. Texas Department of Insurance (TDI) inter-viewees reported that hospital rates paid by managed care organizations are declin-ing substantially. Many hospitals were said to be accepting capitated rates, not justdiscounted fees. Nevertheless, HMO net income per member per month after taxesdeclined by about 60 percent between 1993 and 1995 (TDI undated), and lossesmounted in 1997 (BNA 10/20/97). The industry blames competitive pressures,overregulation, and high pharmacy costs, and expects premiums to rise in the near

future (IHPP 5/11/98). A long-predicted series of closures and mergers appears tobe under way, notably in north Texas (AHL 3/12/98, AHL 3/24/98).


The state relies on conventional HMOs to serve its Medicaid managed care pro-gram. Competition among commercial HMOs is vigorous enough to ensure theirparticipation in Medicaid, according to state officials. Medicaid-only organizationsexist but are not relied upon by the state. Interviewees from an HMO and the HMOAssociation viewed mandatory Medicaid managed care positively but said they wouldfavor starting with pilot programs for disabled individuals and the dually eligible.

Summary Statistics Texas and U.S. Total



















TX

US

84.2

79.7

$22,045

$24,231

17.4

13.8

58

63

153

195

3.2

3.44

18.4

17.0

28.8

11.7

119

127

TX

US

23.9

15.5

39.2

26.7

12.6

12.2

13.2

24.0

03.8

40.1

28.7

$2,826

$3,068

$5,416

$4,750

$1,733

$1,906



32/74


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aged care; one Houston hospital respondent said Medicare HMOs paid the lowestrates of all.

Texas has seen many hospital conversions to for-profit status, led byColumbia/HCAs aggressive expansion as it acquired many hospitals and threatenedto build new ones near existing facilities. Its stance softened after its federal legalproblems surfaced in mid-1997; for example, in Houston, Columbia dropped itsplans to build a new childrens hospital in favor of a collaborative agreement with anexisting facility (AHL 10/16/97). Public hospitals are also converting; four locali-ties put public hospitals under private management or sold them outright.

Hospital consolidation has been under way for a number of years. The state shed120 hospitals in the 1980s, but further closures are not expected because the weak-est facilities have already closed. Nevertheless, merger activity continues at a brisk

pace. For example, 24 large Texas and New Mexico nonprofits formed a corporationto lease, acquire, or manage troubled nonprofits, specifically to forestall conversions(AHL 11/25/97). Also, the two largest nonprofit hospital systems in north Texasplanned to create an alliance by June 1998, joining 22 hospitals and an HMO, sub-ject to antitrust approval (AHL 4/8/98).

Despite mergers, excess capacity remains in some areas. Hospitals are respondingby cutting costs and staff. According to the hospital association, layoffs are easier toimplement in Texas than elsewhere because there are no health care employee unionsand Texas law allows termination without cause. To date, however, few hospitalsappear to have closed beds.

Many hospitals are also playing an aggressive role in managed care by develop-ing integrated networks and PHOs, buying physicians practices, shifting care to out-patient settings, creating partnerships with HMOs, or even pursuing HMO licensure(TMA and MTI 1996). Urban hospital networks have expanded into rural areas inorder to protect their referral bases. One Lubbock hospital network, for example,includes almost every rural hospital within 100 miles (TMA 1996).

Physicians

Physicians have also consolidated. Solo practice has dropped to 40 percent (TMAand MTI 1996).11 In addition, many physicians participate in integrated providernetworks, through PHOs, IPAs, 501(a) provider networks, and physician practice

management organizations. Network formation is uneven across the state, however,with most developing in the big cities, where managed care penetration is highest(TMA 1996).

Managed care participation by physicians has increased rapidly. According to the1996 Survey of Texas Physicians, HMO and PPO patients accounted for 31 percentof physicians patients, twice the rate in 1992, and 18 percent of physicians had somecapitated patients.12 Approximately 20 percent of physicians reported being deniedinclusion in a plan network.

Many Texas physicians dislike HMOs, and the Texas Medical Association hasactively lobbied both to restrain managed care through regulation and to circumventHMOs by accepting capitation risk directly from buyers. Physicians have won


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THE URBANINSTITUTE

requirements that Medicaid managed care programs in some areas include primarycare case management options, viewed as less threatening to physician autonomythan HMO-only programs.

Texas has vast underserved areas. Geographic maldistribution of physicians isworst for specialty services. The medical association has worked with the state andmedical schools to develop loan repayment programs, rural health clinics, registriesof provider needs, continuing education, and recruiting programs for rural students.Although these efforts were initially successful, rural physician supply has plateauedin the past three years. While some communities can recruit doctors, they often can-not retain them. Urban HMOs pay higher salaries and lure primary care physicians,nurse practitioners, and physician assistants away from rural areas.

The Role of Large Buyers

Employer coalitions are active in Houston and Dallas but do not yet play a largerole in influencing Texas health care markets. The Houston Healthcare PurchasingOrganization contracts with 55 hospitals and more than 4,000 physicians to servemore than 130,000 covered lives. The Dallas coalition focuses on quality issues.In 1993, the state created a statewide Texas Purchasing Alliance (TPA) to buy cov-erage for employment groups with 3 to 50 workers.



Texas has extensive HMO regulation. HMOs public image has suffered frombad publicity and medical association lobbying. State requirements have beenimposed in stages. First, administrators promulgated some limited rules, and then in1996 the legislature passed a bill modeled on the American Medical AssociationsPatient Protection Act. Governor George Bush vetoed the bill because he felt itdid more to protect providers than patients, but he ordered health and insurance reg-ulators to adopt some of its provisions. In 1997, a comprehensive consumer protec-

tion bill was enacted that codified many of these administrative rules (Laudicina etal. 1998). The regulatory movement continues both within government agenciesand in the political arena (BNA 5/11/98). In 1998, both Bush and Democratic can-didates for governor have promised new efforts to ensure patient choice of providersby mandating a point-of-service option for all HMOs (AHL 3/4/98).

Texas law sets HMO quality and access standards, including a ban on gag claus-es, coverage of out-of-network referrals and emergency room services, continuity ofcare when a provider leaves a plan, direct access to ob-gyns, and disclosure require-ments (Laudicina et al. 1998). A 1997 statute also permits HMO enrollees torequest binding, independent review of treatment denials by the InsuranceDepartment, at a cost to health plans of $500 each (AHL 3/19/98, IHPP


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5/11/98). The same statute allows enrollees to bring medical malpractice lawsuitsagainst health plans, making Texas the first state to enact such a law (Laudicina et al.1998). One plan sued to overturn the law under ERISA (AHL 4/24/98). This casepromises to be an important test of state authority, with implications for many statesconsidering similar regulation.

Another important and unusual Texas law prohibits MCOs from using financialincentives that directly or indirectly induce physicians to limit medically necessaryservices. TDI has found one plan in violation for using payment withholds andbonuses for pooled groups of physiciansand was supported in court (BNA5/18/98b). Depending on the further interpretation of medically necessary, thisprovision could be a major blow not only to MCOs management of care but also tothe general use of capitation and other incentive approaches in Texas.

PPOs

The state regulates insurers that run PPOs rather than the PPOs themselves.However, most of the HMO patient protection rules also apply to PPOs, includingthe provisions regarding out-of-network referrals. Furthermore, no gatekeeperarrangements are permitted in PPOs. TDI wants to update PPO regulations torequire PPOs to register with TDI and address new risk-sharing arrangements.

Antitrust Policy

Market concentration is of concern to the attorney generals (AGs) staff, whothink that current regulation and case law lag behind changes in the marketplace.This lag is notable with respect to the formation of large integrated systems, whichmay facilitate one-stop shopping for purchasers but which also may inhibit competi-tion. Texas has an antitrust immunity process under the Health Care CooperativeAct, but it applies to such ventures as the joint purchase of a magnetic resonanceimager (MRI) rather than to mergers. The immunity process has never been used.

Nonprofit Requirements and Conversion Policy

Texas enacted a law in 1993 to ensure that nonprofits earn their tax-exempt sta-tus (THT 1996). Charity care plus government-sponsored indigent health care mustequal at least 4 percent of net patient revenue or 100 percent of the value of state

and local tax exemption. Alternatively, a hospital may show that its charity care levelis reasonable in relation to community needs (to accommodate areas with few unin-sured patients). Providing other community benefits may also help qualify a hospitalfor nonprofit status, but only where charity constitutes an acceptable amount as well.Hospitals must file a community benefits plan with the Texas Department of Healthand document their compliance. Hospitals that receive Medicaid DSH payments areautomatically deemed in compliance, and public hospitals, nonprofits that receive nopayment, and hospitals in Health Professional Shortage Area counties with popula-tions under 50,000 are exempt.

Nonprofit conversions to for-profit status have occurred among hospitals,HMOs, and, more recently, insurers, but the states involvement historically has not

been great. In 1996, the state sued to block a proposed merger of the Texas and


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THE URBANINSTITUTE

Illinois Blues. BCBST proposed to dissolve and move operations to Illinois, and theAG sued, arguing that nonprofit assets accrued in Texas would go to enrich Illinoispolicyholders rather than being dedicated to Texas communities. A district courtruled against the state, holding that BCBST is not a charity and operates only forthe benefit of its policyholders, not the public at large (AHL 2/13/98). Legislatorsencouraged the AG to appeal the decision (BNA 4/6/98).

Perhaps in reaction, in 1997 the state enacted a law governing future nonprofitconversions (AHL 8/15/97). The AGs office will apply three major standards innonprofit conversions: (1) Does the organization have the authority in its bylaws tosell or merge? (2) Is the converting organization getting proper value for its assets?(3) Are the funds received being used for the originally chartered purposes?However, there is currently no requirement to provide notice of conversion, and offi-cials report they typically get paperboy notification by reading a newspaper. Thestate is contemplating changes to the conversion statute.


In Texas, 23.9 percent of the population lacks health insurance, 8.4 percentagepoints more than the national average and the second-highest rate among the states,after New Mexico (Liska et al. 1998). Although the states Medicaid coverage rate issimilar to the national rate, among people with incomes below 200 percent of FPL,the uninsurance rate is still 12.5 percentage points above the national average. Thus,

Texas has more poor people who are vulnerable to the potential effects of marketchange than most other states.

The low coverage rate accentuates the importance of safety net hospitals, includ-ing the states large number of public facilities. Public hospitals typically have highMedicaid caseloads and play a large role in indigent care, but the hospital district sys-tem may be an unstable way to finance care for the poor. The willingness and abili-ty of the local tax base to support charity care may prove unreliable, especially giventhe strong antitax sentiment in Texas. In addition, public hospitals are at a disadvan-tage in the competitive environment, because they are constrained by enabling leg-islation that narrowly defines their mission and prevents them from networking withprivately held providers (CRHI 1995).

Unlike many other states, Texas has set standards for charity provision for non-profits to earn their tax breaks. But 4 percent of revenues is not a particularly highlevel of required charity, given the states high uninsured rate; further, nonprofit hos-pitals are only a third of the hospitals in Texas. Aggressive competition in the HMOmarket has brought significant hospital discounting and capitation from health plans.As competition increases, even low levels of charity care may become unsupportable.More safety net hospitals may be forced into conversion or closure. But so far, offi-cials say there have been no complaints about access to charity care.

Finally, the main state assistance to safety net hospitals is Medicaid payment andDSH funding, but DSH funding is decreasing under federal reform, and Medicaidmanaged care will likely cut hospital utilization and payment rates. State officials


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acknowledged that Medicaid managed care and other market changes would placesafety net institutions under pressure and that some would not fare well. Some havealready begun to privatize. Although the Medicaid managed care program currentlyrequires MCOs to contract with all willing significant traditional providers, therequirement applies for only three years (Sec. 533.006, Texas Government Code).Moreover, policymakers see their primary obligation as being to Medicaid beneficia-ries, not safety net providers.


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Florida: Consolidation and Conversion13

Enrollment in managed care has increased rapidly in Florida, in turn puttingpressure on hospitals and physicians to provide services at discounted rates.The current market can be characterized as volatile: Florida HMOs aremerging and acquiring one another at a fast pace. The hospital market also

has seen rapid consolidation into three major systems, as well as a high rate of own-ership conversions, leaving one-third of Florida hospital beds in for-profit hands.

Florida recently enacted comprehensive managed care regulation, but most

respondents indicated that the state maintains a positive attitude toward managedcare. Both HMOs and hospitals have so far enjoyed relative financial security, and thepoor have been well served. But as HMO enrollment grows and consolidations inthe two markets continue, that may change.


Managed care has been growing rapidly in Florida. Commercial HMO enroll-ment grew 17 percent a year between 1990 and 1995, according to respondents. Asof 1996, 26.3 percent of the states population was enrolled in HMOs. HMO mar-

ket penetration, however, varies by area, with highs of 42.1 percent in Tallahasseeand 40.8 percent in Dade County (Miami) in 1995. Rural areas of the state havemuch lower rates.

Competition among managed care organizations is considered greatest inJacksonville, Miami, Orlando, and Tampa. Statewide, however, enrollment in com-mercial managed care is largely concentrated in a few HMOs. As of 1996, 10 HMOsaccounted for approximately 81 percent of commercial enrollment and 5 HMOsaccounted for almost 60 percent of the market.14 As in other parts of the country,HMOs in Florida are consolidating through acquisitions and mergers; 18 occurredbetween 1993 and 1995 (FAMCP 199495, FHA 19881995).


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chasing and administration. Also, some acute care beds have been converted to nurs-ing beds.

Florida hospitals are also purchasing physician practices, developing PHOs, andcreating or purchasing HMOs as strategies for maintaining control of local markets.According to FHA data, as of 1994, 70 of the states 180 hospitals had developedPHOs. A group of hospitals in Miami, each with its own PHO, formed theDimension system,16 a super-PHO composed of both for-profits and nonprofits.The group controls 26 percent of the hospital beds in the county and owns an HMOthat spreads risk among its members.

According to respondents, many hospitals in Florida have been forced to rethinktheir ownership status because of (1) increasing competition, (2) reductions in pub-lic funds (both tax support and funds for capital investment), and (3) stringent laws

that reduce the operational flexibility of nonprofits and publics. These constraintshave resulted in a significant number of conversions. Chollet et al. (1996) found thatwhile Florida had only 3 percent of U.S. hospitals, the Florida market accounted forapproximately 6.5 percent of all U.S. hospital ownership conversions between 1990and 1993. Many conversions from public status were among rural hospitals, whichwere particularly hard hit by increases in competition and reductions in public funds(Chollet et al. 1996, FHA 1996).

The Role of Large Buyers

In its 1993 health reform legislation, Florida created 11 regional CommunityHealth Purchasing Alliances (CHPAs) to help employers with up to 50 workers pooltheir purchasing power. As of 1998, CHPAs purchased insurance for nearly 80,000Floridians, half of whom were uninsured before they enrolled in the CHPA (AHCA1998). CHPAs must now face the challenge of surviving without state financing,which was provided only through 1997. CHPAs are cutting costs, marketing heavi-ly, and trying new ideas, such as acting as third-party administrator for self-insuredbusinesses. A 1998 law continued CHPA eligibility for groups that expand beyond50 employees (F&G 1997).



In 1996, the state enacted S.B. 886, which included a number of changes to stateregulation of managed care organizations. First, the bill required the Department ofInsurance to publish the medical loss ratios of all plans, though there continues tobe debate around categorizing medical expenses versus administration and profit.S.B. 886 also required HMOs to pay for emergency room screening tests that areconsistent with symptoms. The state also enacted other HMO-related laws, includ-


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Jacksonville refused to provide documents regarding a proposed relationship withColumbia/HCA.17 In late 1997, UMC abandoned plans to join Columbia becauseof political opposition and concerns about UMCs ability to retain tax-exempt statusas part of Columbia (AHL 12/11/97).


Floridas 19.2 percent uninsurance rate is high compared with the national aver-age of 15.5 percent (Liska et al. 1998). This is partly because employer-sponsoredcoverage is lower in Florida than the national average, especially among dependents.Florida has slightly more small businesses than other states, and more small-firm

workers are uninsured in Florida (31.7 percent) than nationally (25.2 percent) (Liskaet al. 1998). The demand for uncompensated care in Florida is therefore high. Thelarge number of conversions of hospitals, especially public hospitals in rural areas,and the pressures of competition as a result of the growth of managed care havemany in the state worried about possible declines in charity care.

Safety net institutions currently remain in relatively good financial health, how-ever, in part because of the unique non-Medicaid financing arrangements that existin some metropolitan areas with large low-income populations. An example isHillsborough County, which has used local tax dollars to fund the HillsboroughCounty Health Care Plan since 1992 to insure nearly two-thirds of its uninsuredlow-income residents. Providers in the county faced a double-digit growth rate in

uncompensated care before the plans inception. However, it should be noted thatlocal government financing of charity care depends on the ability and willingness ofa small population to support an expensive program with local tax dollars. Thissource of funding is probably not as stable as a state program, which draws from alarger tax base, might be.

The unstable condition of several of the Medicaid HMOs may also pose futuredifficulties for the poor. HMOs may fail or leave the market, with implications forthe states efforts to maintain cost reductions in its Medicaid program. Florida hasthe fourth-largest total Medicaid enrollment in the nation, but its per capita spend-ing for Medicaid is ranked 46th.

Another insurance access issue for the low-income is the uncertain future of the

Community Health Purchasing Alliances, which are currently facing the challenge ofsurviving without state financing. Low-income wor

Documents

Healthcare Market Competition 1998